BW Online | April 4, 2003 | Tech's Slower March to Market

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APRIL 4, 2003

NEWS ANALYSIS
By Olga Kharif

Tech's Slower March to Market
With sales slumping and customers demanding better performance for the price, manufacturers are lengthening their product cycles

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For the past decade, Canada's ATI Technologies has released new and improved versions of its graphics chips every 18 months. For much of that time, the Net boom was in full swing, and the PCs and game consoles that use ATI's components were leaping off store shelves. With as many as 50 chip companies vying for the market, only state-of-the-art advances could keep ATI ahead of the pack.

The plan worked. ATI (ATYT ), now with an estimated 19% of the market, and Nvidia (NVDA ), with 32%, are the only major specialized makers of graphics chips to survive. (Intel (INTC ) holds a 28% share of the graphics-chips markets, and two smaller rivals own single-digit bites.) That has given ATI the leeway to make a surprising decision: On Mar. 31, it confirmed that it will lengthen its product cycle to 24 months.

Graphics chips are becoming so complex that ATI would have had to raise its research and development budget by more than the usual 10% a year to maintain its prior pace of innovation, notes Rick Bergman, a senior vice-president. Given that sales of PCs -- ATI's prime market -- have been stagnant for the past two years, delivering a whiz-bang chip every 18 months isn't likely to do more for the chipmaker's bottom line than introducing one every two years.

PROFIT VS. LOSS. After three years in the doldrums, more and more technology companies are starting to wrestle with two options: Should they risk lower returns by pushing new products out the door at the same frenetic speed as when demand was hot? Or should they take it slow to be sure of recouping investments and saving on R&D costs? While most of the biggest names in technology are coy about their product-cycle plans, some, like chipmaker AMD (AMD ) and the world's largest cell-phone manufacturer, Nokia (NOK ), have said they'll scale back R&D in 2003.

There's no doubt, however, that product cycles are growing longer in the software, chip, and telecommunications-equipment industries, which have yet to see the long-awaited rebound. When business stays weak for so long, says Michael McConnell, an analyst with Pacific Crest Securities in Portland, Ore., "at some point, you have to ease up on the pedal."

For companies like ATI, such a move can make the difference between profit and loss. Lengthening its product cycle means it'll be able to hold R&D spending flat in 2003 at $165 million, vs. the $180 million or so it would otherwise have had to lay out. At the least, that will narrow ATI's net loss, which amounted to $8.3 million in the quarter ended Feb. 28, despite a 20% increase in sales, to $318.5 million.

"NECESSARY EVIL." Stretching out product introductions also lets companies focus on firming their relationships with existing customers. Software maker PeopleSoft (PSFT ) now releases new versions of its customer relationship management (CRM) product every 12 months to 15 months, vs. every 9 months as recently as two years ago. Now that budget-conscious CEOs and boards of directors, instead of chief information officers, are making information-technology purchasing decisions, companies "are no longer buying the new, cool stuff," says Ram Gupta, PeopleSoft's executive vice-president for products and technology. Instead, customers want existing products to be easier to integrate and to deliver a faster return on investment.

Tackling those challenges takes longer than developing new features -- and it's more expensive, says Gupta. But proving that a new piece of software can deliver tangible savings is often the only hope of making a sale. Indeed, about 35% of some 152 chief financial officers recently surveyed by Forrester Research complained that the technology their outfits have bought rarely lived up to its promise.

"For the first time in a while, information technology is seen as a necessary evil rather than a liberating force," says Ted Schadler, an analyst with Forrester. "It's a whole different ball game," adds Gupta, who notes that PeopleSoft has steadily increased R&D expenditures while lengthening development cycles.

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